2019 Financial
and Social Report

Liquidity Risk

The objective of liquidity risk management is to ensure and maintain the Group’s ability to meet both current, as well as future funding requirements taking into account costs of funding.

Liquidity risk reflects the possibility of incurring significant losses as a result of deteriorated financing conditions (financing risk) and/or of the sale of assets for less than their market value (market liquidity risk) to meet the needs for funding arising from the Group’s obligations.

There were no exposures to liquidity risk at a subsidiary level, because the Bank manages liquidity risk centrally. Both the financing requirements and any liquidity surplus of subsidiaries are managed by transactions with the Bank, unless specific market transactions are previously decided and agreed. The Treasury Department is responsible for the day-to-day management of the Group’s liquidity position in accordance with the adopted rules and procedures taking into account goals defined by the Management Board and the Capital, Assets and Liabilities Committee.

In 2019, the Group was still characterized by solid liquidity position, despite deterioration of all the supervisory and internal liquidity indicators at the day of Euro Bank’s acquisition. However, all ratios remained within limits in place (no excesses for both supervisory as well as internally defined limits).

Due to merge of Bank Millennium with Euro Bank, the Group’s Loan-to-Deposit ratio increased and was equalled to 86% at the end of December 2019 (comparing to level of 80% as of end of December 2018). Apart from the increase, the Group kept its Loan-to-Deposit ratio well below 100% in line with its risk appetite defined for 2019.

Keeping the comfortable liquidity position was possible mainly due to actions planned by and taken by the Group before the merge with Euro Bank. The Group mainly increased stable deposit base from individuals and issued ten years subordinated bonds in total nominal amount of PLN 830.0 million with maturity date on 30 January 2029, so that in advance allowed to improve its liquidity buffer and as at Euro Bank’s acquisition date enable the Group to repay Euro Bank’s external financing as well as completely covered the purchase price by liquidating part of accumulated liquidity surplus (liquidity assets portfolio). Thanks to this no additional sources of funding was required with simultaneous safe liquidity position kept.

The liquidity assets portfolio, that is portfolio of government debt securities, supplemented by the cash and exposures to the National Bank of Poland, is treated as the Group’s liquidity reserve, which will overcome crisis situations. After finalizing the transaction of Euro Bank’s acquisition, any liquidity surplus was again invested in the portfolio of liquid assets in order to rebuild liquidity buffer. At the end of 2019, the share of Polish government securities (including NBP Bills) in total securities portfolio amounted to 99% and allowed to reach the level of approx. PLN 22.5 billion (23% of total assets), that is the level observed at the end of December 2018 (PLN 22.7 billion, 28% of total assets).

Consequently, the large, diversified and stable funding from retail, corporate and public sector Clients remains the main source of financing of the Group. At the end of 2019 total Clients’ deposits of the Group reached the level of PLN 81.5 billion. The deposit base constituted mainly funds of individuals Clients, of which the share in total Client’s deposits equalled to approx. 75.0% at the end of December 2019 (72.1% at the end of December 2018). The high share of funds from individuals had a positive impact on the Group’s liquidity and supported the compliance and further grow of the supervisory liquidity measures.

Concentration of the deposits base, based on the share of top 5 and top 20 depositors, at the end of 2019 amounted respectively to 2.3% and 4.9 % (in December 2018 it was respectively 3.2 % and 6.5 %). The level of deposit concentration is regularly monitored and did not have any negative impact on the stability of the deposit base in 2019. In case of significant increase of the share of the largest depositors, the additional funds from the depositors are not treated as stable. Despite of that, in order to prevent deposit base fluctuations, the Group maintains the reserves of liquid assets in the form of securities portfolio.

The deposit base is supplemented by the deposits from financial institutions and other money market operations. The source of medium-term funding remains also medium-term loans, subordinated debt, own bonds issue and bank’s securities.

During 2019 the Group continued to explore the possibility of rising additional funding from loans from financial institutions, bond issues and bank’s securities in order to diversify the source of funding with particular attention to the cost of obtaining these funds. The total balance sheet value of medium-term loans from financial institutions at the end of 2019 amounted to PLN 1 166.1 million (at the end of December 2018 it was PLN 1 227.5 million).

In 2019, the Bank issued 10-year subordinated bonds with a nominal value of PLN 830 million and bank securities, in thirteen series, with a total nominal value of PLN 242.03 million, with 2 years maturity. Millennium Leasing issued 2-year bonds with a total nominal value of PLN 74.75 million. At the end of December 2019 the total balance sheet value of bonds and bank’s securities issued by the Group (without subordinated bonds) amounted to PLN 1 183.2 million (PLN 809.7 million in nominal value in December 2018). This amount also includes 4-year bonds issued by the Euro Bank S.A. (nominal value of PLN 250 million), maturing on 1st December 2021.

The Group manages FX liquidity through the use of FX-denominated bilateral loans as well as Cross Currency Swap and FX Swap transactions. The swaps portfolio is diversified in term of counterparties and maturity dates. For the majority of counterparties the Group has signed a Credit Support Annex to the master agreements. As a result, in case of unfavourable changes of FX rates (PLN depreciation), the Group is obliged to place deposits as a collateral with counterparties in order to secure the settlement of derivative instruments in the future, and in case of favourable FX rates changes (PLN appreciation) receives deposits as a collateral from the counterparties. In none of signed ISDA Schedules and Credit Support Annex (both international and domestic) there exists a relationship between level of the Bank’s ratings and parameters of collateral. The potential downgrade of any of the ratings will not have impact on method of calculation and collateral exchange.

The Group assesses the possibility of unfavourable changes of FX rates (especially CHF and EUR, which causes increase of liquidity needs), analyses the impact on liquidity risk and reflects this risk in the liquidity plans.

The estimation of the Group’s liquidity risk is carried out with the use of both measures defined by the supervisory authorities and internally, for which exposure limits were established.

The evolution of the Group’s liquidity position in short-term horizons (up to 3 months) is tested daily on the basis of two internally defined indicators: immediate liquidity and quarterly liquidity. Both such indicators measure the maximum borrowing requirement, which could arise on a particular day, taking into consideration the cash-flow projections for spot date and period of 3 months, respectively. Additionally, the liquid asset portfolio is calculated on the daily basis.

These figures are compared with the exposure limits in force and reported daily to the areas responsible for the management and control of the liquidity risk in the Group as well as presented in monthly and/or quarterly basis to the Bank’s Management Board and Supervisory Board.

During 2019, all internal liquidity indicators were well above minimum limits. The liquidity risk limits are revised at least once a year in order to take into account, inter alia, the change of the size of the consolidated own funds, current and expected balance sheet structure, historical limits’ consumption, as well as current market conditions and supervisory requirements. The current limits in place have been valid since 1st January 2019 and will be replaced by revised limits on 1st January 2020.

Current Liquidity indicators PLN million

Immediate liquidity ratio (m PLN)* Quarterly liquidity ratio (m PLN)* Liquid assets Portfolio
(m PLN)**
LCR (%)
Indicator 18 795 18 795 22 795 171%
Minimum limit 957 (1 596) 12 000 100%
Immediate liquidity ratio (m PLN)* Quarterly liquidity ratio (m PLN)* Liquid assets Portfolio
(m PLN)**
LCR (%)
Indicator 20 228 20 228 22 836 212%
Minimum limit 934 (2 336) 10 000 100%
* Immediate and Quarterly Liquidity Indicator: The sum of cash flows in spot date or during the next 3 months respectively, Nostro Balance (the algebraic sum for all currencies reduced by obligatory reserve) and Highly Liquid Assets.
** Liquid Assets Portfolio: The sum of cash, exposure to Central Bank (the surplus above the required obligatory reserve) and Polish Government debt securities, NBP-Bills and due from banks with maturity up to 1 month. The debt securities portfolio is reduced by NBP haircut for repo transactions and securities encumbered for non liquidity purposes.

The Group monitors liquidity on the basis of internal liquidity measures, taking into account in particular the impact of FX rates on the liquidity situation.

According to the Regulation of European Parliament and Council no 575/2013 on prudential requirements for credit institutions and investment firms (CRR), the Group is calculating the liquidity coverage requirement (LCR). The regulatory minimum of 100% for LCR valid in 2019 was complied by the Group (as of the end of December 2019 the LCR reached the level of 171%). The measure is calculated daily and has been reported on the monthly basis to NBP since March 2014. Internally, the LCR is estimated daily and reported to the areas responsible for the management and control of the liquidity risk in the Group. In 2019, the Group complied also with supervisory measures imposed by KNF Resolution 386/2008 as well as regulary calculated net stable funding requirement (NSFR). In each of the quarter, the NSFR was above planned supervisory minimum of 100% (supervisory minimum will be valid in June 2021).

Additionally the Group employs an internal structural liquidity analysis based on cumulative, behaviour liquidity gaps calculated on a real basis (i.e. assuming the probability of cash flow occurrence). The safe level adopted by the Group for the ratio of liquidity shortfall is established for each time bucket below 5 years.

In 2019 liquidity gaps were maintained at levels significantly above the safe limits. The results of cumulative, behaviour liquidity gaps (normal conditions) are presented in tables below.

Adjusted Liquidity Gap (PLN million) up to 6M 6M to 12M 1Y to 2Y 2Y to 3Y 3Y to 5Y Over 5Y
Adjusted balance assets 33 558 6 884 11 756 9 705 12 790 36 047
Adjusted balance liabilities 11 067 4 415 8 205 6 494 9 393 63 202
Balance-Sheet Gap 22 491 2 469 3 551 3 211 3 397 (27 155)
Cumulative Balance-Sheet Gap 22 491 24 960 28 511 31 722 35 119 7 965
Adjusted off-balance assets 216 249 80 37 32 4
Adjusted off-balance liabilities (1 435) (71) (87) (39) (48) (8)
Off-Balance Sheet Gap (1 219) 178 (7) (2) (15) (4)
Total Gap 21 272 2 647 3 545 3 209 3 382 (27 159)
Total Cumulative Gap 21 272 23 919 27 464 30 673 34 055 6 896
Adjusted Liquidity Gap (PLN million) up to 6M 6M to 12M 1Y to 2Y 2Y to 3Y 3Y to 5Y over 5Y
Adjusted balance assets 30 398 5 728 7 932 7 389 8 953 29 089
Adjusted balance liabilities 10 423 3 001 6 122 4 417 6 671 54 803
Balance-Sheet Gap 19 974 2 727 1 810 2 972 2 283 (25 714)
Cumulative Balance-Sheet Gap 19 974 22 701 24 511 27 482 29 765 4 051
Adjusted off-balance assets 77 64 410 53 33 4
Adjusted off-balance liabilities (1 294) (83) (114) (61) (39) (10)
Off-Balance Sheet Gap (1 217) (20) (296) (9) (6) (6)
Total Gap 18 757 2 707 2 106 2 963 2 277 (25 720)
Total Cumulative Gap 18 757 21 465 23 571 26 534 28 811 3 090

The Group has developed a liquidity risk management tool defining sensitivity analysis and stress scenarios (internal, external and combination of both). For the purpose of stress tests, liquidity gaps are calculated on a real basis assuming a conservative approach to the assessment of probability of cash flow occurrence among others taking into account a reduction of deposits, delays of loans repayment, deteriorated liquidity of the secondary securities market, the highest cost of funding – the assumption of the worst observed margins on deposits in the Bank, parallel shift of the yield curve and PLN depreciation.

Stress tests are performed at least quarterly, to determine the Group’s liquidity-risk profile, to ensure that the Group is in a position to fulfil its obligations in the event of a liquidity crisis and to update the liquidity contingency plan and management decisions. Additionally, stress test results are used for setting thresholds for early warning signals, which aim is to identify upcoming liquidity problems and to indicate to the Management Board the eventual necessity of launching Liquidity Contingency Plan.

The results of the stress test analysis demonstrated that the liquidity indicators will be maintained above the established limits.

The information regarding the liquidity risk management, including the utilization of the established limits for internal and supervisory measures, is reported monthly to the Capital, Assets and Liabilities Committee and quarterly to the Management Board and Supervisory Board.

The process of the Group’s planning and budgeting covers the preparation of the Liquidity Plan in order to make sure that the growth of business will be supported by an appropriate liquidity financing structure and supervisory requirements in terms of quantitative liquidity measures will be met.

The Group has also emergency procedures for situations of increased liquidity risk – the Liquidity Contingency Plan (contingency plan in case the Group’s financial liquidity deteriorates). The Liquidity Contingency Plan establishes the concepts, priorities, responsibilities and specific measures to be taken in the event of a liquidity crisis. The Liquidity Contingency Plan is revised at least once a year. In 2019 the Liquidity Contingency Plan was tested and revised in order to guarantee that it is operationally robust. The Plan also adapted revised warning thresholds for early warning indicators, taking into account scenarios and stress test results. The revised Plan was approved by the Supervisory Board in December 2019.

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